Excerpt: Giant Shifts by Jimmy Vallee

The Digital Future of Oil and Gas

I’ve been fortunate enough in my life to be quasi-observant of the things going on around me. Two moments in particular stand out with respect to how pervasive technology has become in our lives and how it will continue to fundamentally change the oil and gas business.

The first moment was in 2008 when my oldest daughter, Rebekah, was entering Houston Christian High School. The guidance counselor mentioned to my wife, Kris and I that technology for the kids these days isn’t just important – “it’s like oxygen.” Wow! That analogy. This “thing” my kids are up to – texting, speaking in acronyms, using apps like Snapchat and Instagram – is so intertwined with their daily lives – it’s likened to breathing.

The more recent “aha” moment came at my annual Paul Hastings Partners Meeting in 2015, where we were fortunate to have Ray Kurzweil as keynote speaker. Ray is a visionary. One of the world’s leading inventors, thinkers and futurists, he holds twenty honorary doctorates, has received honors from three U.S. presidents, and is currently the Director of Engineering at Google. His book, “The Singularity Is Near,” will change your life - but I digress.

At this meeting, Ray presented a very compelling vision of our future and how industries are fundamentally changing through the integration of our human condition with machines. Since that meeting, I’ve been driving my family nuts - getting the “Olympic eye-roll” every time I mention nanobots and how they’re going to revolutionize everything we experience. Thanks Ray. Now I can’t sleep at night.

Being an oil and gas man, I naturally start thinking about how these kids and their “techno-oxygen” are going to transform the energy biz, revolutionizing exploration and production while sitting on the couch with their smartphones. Making it easier, faster and more environmentally safe than ever before. Exploration activities become like playing a video game - sending nanobots into the subsurface, projecting high-definition, three-dimensional renderings of reservoirs. Never a dry hole – a hit every time.

Wildcatting, Seismic and the Shale Revolution

The story of oil and gas is largely a story of technology, and we’ve made huge strides in the last three hundred years. Consider the mid 1700’s to early 1800’s; hunting sperm whales for oil to light homes, public streets and lighthouses. The “lumen” as a standard measure of light was designated during the heyday of the “spermaceti” candle and Herman Melville referred to whale oil being “as rare as the milk of queens.”

Technological innovation saved the whales, and in the mid-nineteenth century, Abraham Gesner introduced the combustible hydrocarbon – kerosene - extracted from crude oil in lieu of whale oil. The industrial revolution brought an explosive demand for refining oil into kerosene and gasoline. In 1859, Edwin Drake drilled his landmark oil well near Titusville, Pennsylvania, setting off an oil rush that drew prospectors from all over the country looking to strike crude. Around 1870, growing tired of moving oil barrels by rail, John D. Rockefeller stumbled across transporting oil via pipelines (by 1877, Rockefeller’s Standard Oil controlled nearly ninety percent of America’s pipelines).

On January 10, 1901, a magnificent geyser of crude burst up more than a hundred and fifty feet in the air from Spindletop Hill, located above a salt deposit near Beaumont, Texas. Producing nearly 100,000 barrels a day, the gusher was the seed of a booming oil industry that sprouted up around Spindletop – the origin of the majors like Exxon, Gulf Oil and Texaco.

At this time, exploration was based largely on guesswork. Abundant seeps, geological hunches and healthy amount of luck were the tools of the trade. The late nineteenth century brought about wildcatting - drilling test wells in largely untested areas and creating drilling logs for geologists to interpret.

“The discovery of the fluid in New York State was the signal for a general exodus of wildcatters from all parts of the oil country…”

Innovators continued to bring developments in oil exploration – leveraging the earth’s gravitational field, magnetic changes and electrical resistance. In 1914, German mine surveyor, Ludger Mintrop, devised the mechanical seismograph to detect salt domes. The first U.S. seismic field tests were conducted near Oklahoma City in 1921. Locating deposits of crude oil through the recording and interpretation of artificially induced shock waves was a breakthrough, but seismology was viewed with skepticism for years.

“As one who personally tried to introduce the method into general consulting practice … reflections were not even considered on a par with the divining rod, for at least that device had a background of tradition.”

Seismic is a good example of how slow our industry can be in the adoption of new and beneficial technologies. Seismic took fifty years from the first time it was implemented and proven to actually be integrated as a common technique in the industry. Yet seismic eventually flourished, and numerous mechanical engineering developments continued to assist the industry. From the 80s through the late 90s, it was largely believed that we as a global society had reached “peak oil.” We’d discovered all of the recoverable resources in existence and were at a maximum rate of production.

At that time, George Mitchell was working with his team of engineers on combining a couple of technologies that had been used in the business for many years, but not necessarily perfected. One was to “grow up” from just vertical drilling and start experimenting with horizontal drilling, curving the drill bit under the surface and moving laterally. This was coupled with a process of flooding oil reservoirs with water and other chemicals to fracture fragile shale rock formations. The fractures increased permeability for the hydrocarbons, oil and natural gas to flow into the well bore and up to the surface. Mitchell’s combination of technology led to a renaissance in the American oil and gas industry - the Shale Revolution. Now, peak oil is a distant memory. The world is producing more oil than ever before.

Petroleum Technology Status Quo

The industry should be commended for its innovations in locating and pulling crude from the toughest earth and deepest seas, but the most basic daily monitoring and data analysis methods remain doggedly old school, resulting in expensive inefficiencies and costly delays. In the Eagle Ford Shale region of Texas right now, there’s a guy in a truck driving across acres of land to a pump jack to check the meter. He jots the numbers down by hand, drives back, and spends hours plugging the data into an Excel spreadsheet before sending it to management for a their analysis and decision-making process. Hours, sometimes days later, maintenance is getting started on the necessary adjustments.

Uptime is crucial in the oil and gas industry. A malfunctioning well can result in operating costs and lost revenue of up to $100,000 for every day it takes to repair. Once the well is up and running again, it takes valuable human resources to make sure it stays up and running. This long, drawn out reactive approach is a waste of both time and money.

The industry has certainly considered replacing pen and paper with high-tech sensors and smartphones, but the Shale Revolution put the digital agenda on the back burner when speed of production surpassed efficiency on the priority list. As of April 2015, the U.S. was producing approximately 9.3 million barrels a day, the maximum oil production ever seen. Our storage capacity was the highest ever at 480 million barrels – 1.5 years of production is sitting in storage3. Today, the worst oil slump in decades is rekindling interest in the digital oilfield initiative. Companies are setting their sights on the gadgets, software and mobile devices that promise more for less.

From Cellphone to Wellhead: Drones, Nanobots and the Internet of Things

In December 2015, the U.S. Geological Survey estimated the undiscovered resources of the Barnett Shale in the Bend Arch-Fort Wort Basin Province alone to be 53 trillion cubic feet of shale gas, 172 million barrels of shale oil, and 176 million barrels of natural gas liquids4. The Energy Information Administration estimates the undiscovered, technically recoverable oil resources of the U.S. to be around 198 billion barrels5.

Companies today generally have three kinds of tools they can use to locate these undiscovered resources: (1) drilling site core samples; (2) well sensor readings; and (3) seismic data. We currently have access to three-dimensional reservoir imaging using seismic data (though it took thirty years for fifty percent of the oil and gas industry to adopt it), but these images are still vague, static representations that can’t provide the more valuable data like chemical makeup, pressure, temperature or permeability.

As fate would have it, we are at a place in time when the most technologically advanced generation in history, the Millennial generation, is matriculating into the workforce. These millennial workers are technologically driven. They want to analyze data, dispatch orders, and manage our massive hydrocarbon exploration, production, delivery and consumption systems from their tablets and smartphones. The tech-savvy millennials are going to devise technologies that will drive the industry into a more efficient and profitable future.

I have this vision that I call “from cell phone to wellhead.” It’s the vision of my youngest daughter as an adult business person controlling an entire oil and gas operation from her phone or tablet in the comfort of her living room. The concept of remote metering and controlling automated valve systems through a simple app - the “oil and gas turbo-pack” - in Silicon Bayou – Houston, Texas.

There are three areas to exploit in marrying the glossy Silicon Valley technology with the dirt and grime of the hydrocarbon business. First, seismic and micro-robotic data capture and analysis systems and software, required to analyze the physical characteristics of reservoirs. Second, the business systems. Smaller oil and gas companies are still running Excel-based business systems. Their supply chain management, workflow management, people management and accounting control are all based on archaic systems that could be dramatically improved using tech-driven systems that make analysis a cinch. The third area is in operations technology. Superviosory Control and Data Acquisition (SCADA) systems, sensors, nanorobotics, data collection and measurement, remote pipeline metering, remote throughput and pressure observation and control. These are the changes that come with the “Internet of Things” (IoT).

In June 2015, McKinsey & Company’s research arm, McKinsey Global Institute, estimated the potential economic impact of IoT to be as much as $11 trillion per year by 2025. IoT encompasses our future, our existence within this interconnected hydrocarbon system. It literally provides a reservoir-to-consumer system that is smart: metered, observed, and analyzed so that it can be maintained and improved on a constant basis. Exploration, drilling, production, gathering, processing and transportation to market areas have conventionally been a discontinuous process. IoT can bring them together. Integrating IoT with oil and gas creates a more efficient, easier, faster, less labor intensive and more environmentally sound system, to say the least.

IoT will allow us to capture a complete and accurate three-dimensional picture of our reservoirs, no matter how accessible, and read the exact pressure, temperature and chemical makeup. A software program will crunch all that data and determine the economic usefulness – before we drill. With remote control automated valve systems, we can open and close valves as the market fluctuates, right from our tablets and cell phones.

Siemens is already using IoT to provide automation solutions for oil and gas extraction, production and transportation. Their Totally Integrated Automation (TIA) system helps to collect, consolidate and analyze real-time data across the entire oil and gas operation, “from the tip of each drill bit to the refinery’s blending pool.” Their devices are built to weather extreme temperatures, severe vibration, salt water spray, heats waves and ice buildup. The integrated system diagnostics continually monitor production status and offer comprehensive system analysis at any time, on-site or remotely so issues can be diagnosed as they happen.

Beta testing is already in the works for IoT pipeline upstream incident management. Sensors that detect changes in pressure and flow are installed within each pump. When pressure falls or temperature fluctuates, a warning signal alerts the operator back at the office. Sophisticated software programs then recommend the next best actions, the cost of each action, and the estimated time until total pump failure. Cloud technology monitors the sensors continually, allowing faults to be identified immediately and located much more accurately for maintenance. Field crews are able to access current asset data and enter new information on mobile devices that is then synchronized to the corporate record and accounting systems.

While competitors are riding out the current crude slump using traditional downsizing tactics, companies like Occidental Petroleum are using this time to perfect their digital oilfield initiative - Project Re-Imagined Oil Field - to develop new and innovative oilfield applications like “smartpumps” that automatically adjust their flow based on demand and drones that examine oil rig status6.

In June of 2014, the Federal Aviation Administration granted the first oil and gas company permission to use commercial drones to patrol their Alaskan oil fields. BP and the unmanned aircraft manufacturer, AeroVironment, worked together to outfit the four-foot-long “Puma” with high-tech electro-optical and infrared sensors for ground surveillance of the Prudhoe Bay oil field.

Self-piloting drones currently being developed for oil and gas are similar to the $800 drone you got for Christmas last year, but with one significant difference – they’re virtually self-sufficient. After Identified Technologies’ three-foot-wide “Boomerang” has traversed several acres of land and is running low on power, it steers itself back to a docking station to self-install a new battery.

Imagine the ultimate in drone innovation: through stereoscopic vision, drones could detect a malfunction and order a 3D-printed replacement part to be crafted and installed on site. Drones could eventually fill discovery roles entirely, collecting subsurface data from the air with sensitive seismic sensors. Surveillance footage software would analyze the data in real-time – eliminating mining, reducing accidents, conserving the environment and lessening the overall cost of fuel production7.

And what about the nanobots?!? Most of us have heard some mention of the space-age use of nanorobotics in modern medicine - tiny robots injected into the bloodstream to battle it out with cancer cells – something our immune systems can’t do on their own after a million years of evolution. These little robots are also making headway in the oil and gas arena. In 2007, Saudi Aramco’s EXPEC Advanced Research Centre began investing in the development of reservoir robots, or “Resbots,” microscopic robots less than 1/100th the width of a human hair. These tiny machines are injected into a reservoir where they navigate the porous rock formations and report data on temperatures, hydrocarbons, water and gas, providing a complete chemical and physical map of the reservoir.

In 2009, several major oil companies including BP, Royal Dutch Shell, Marathon and ConocoPhillips funded research at Rice University to design tiny devices a mere one atom thick and sixty nanometers long that could detect a reservoir’s oil, sulfur and water amounts. Trillions of these nanobots are injected into rock formations thousands of feet underground and then brought back to the surface where changes in their chemical makeup reveal valuable information about the reservoir8.

Rice delved further in 2014, developing fluorescent nanoreporters that could detect how “sour” or “sweet” a reservoir is based on its hydrogen sulfide content. Extremely valuable information. Even a one percent sulfur concentration can destroy pipelines and transport vessels, and the process involved in converting high-sulfur sour crude into usable sweet crude is highly-expensive9.

Technology Delays: The Nature of the Beast

The question then becomes…why the delay in adopting these incredible technologies that are readily available, save us tons of money, help curtail environmental damage and save lives?

For one, consider the nature of the beast. Oil and gas exploration proceeds at the snail’s pace of its colossal equipment necessitates. Production moves at the rate it takes to maneuver the heavy rotary diggers, hulking trucks and towering cranes into place on a job site. Not to mention the time spent on maintenance, breakdown and repair. The enormous overhead has played its own role in steering oil and gas away from innovation. Drilling machinery alone costs many thousands per day – whether in operation or not.

Oil field conditions aren’t necessarily conducive to speed. Locating and then accessing resources requires permeating deep into the earth and sea, through Arctic glaciers and desert haboobs. The smartphones and tablets so intertwined with our lives today weren’t built to stand up to these harsh environments. Remote job sites lacked the cellular coverage it requires for sophisticated sensors to transmit wireless data. Device modifications, remote coverage and other technology outfitting required to digitize the oilfield doesn’t come cheap.

Transition to paperless record keeping, reporting and data analysis is still a struggle. The industry is already overwhelmed with oil field data and the oil business’ persistent mentality isn’t partial to putting everything on hold to convert their tried and true logging methods and Excel-based analytics to the newer techniques of today. At $100 per barrel, why fix something that isn’t broken?

However, generational dynamics will play a fundamental role in the movement to digitize the oil business. Very few individuals have matriculated into the industry in the last fifteen to twenty years. After the 1980s oil bust, the oil and gas industry had seen its heyday. Many of the best and brightest engineers and scientists didn’t want to pursue geology and petroleum engineering and instead chose to move into the booming high-tech ventures of Silicon Valley – and, up until now, there has been no real cooperation between Silicon Valley and the oil and gas industry.

The transition of knowledge from the military-minded, top-down baby boomers leadership into the independent, technologically adept, entrepreneurial, do-everything-themselves millennial generation is just now happening at the post macroeconomic level. The knowledge base of the oil and gas industry is moving into retirement - as slow as we can possibly allow them.

Prior to the Shale Revolution, as the industry looked to improve operations, make smarter choices and cut down on wasted crew time, the small number of Gen Xers in the industry made their move to digitize the business. Technological advances in mobile devices, sensors, imaging, software and other tools urged the digital efforts forward, but initiatives were shelved when skyrocketing oil prices triggered a drilling rush that left little financial incentive to continue.

Continued focus on short-term profits and delay in the necessary steps it’s going to take to move forward into the digital world means a very volatile, difficult future for the oil and gas industry that we can’t escape and can’t control. With our experience base transitioning out, we aren’t bringing technology onboard fast enough to be equipped to handle the losses in human and knowledge capital.

Once again, we find ourselves in a depressed commodity price environment. Capital spending for the exploration and production of hydrocarbons is being dramatically reduced. Although we need the technology yesterday, the industry is less than motivated to come online. Coupled with the layoff of skilled workers, the millennial labor force is further given the impression that the oil and gas industry isn’t the place to spend their future.

Silicon Valley-driven technology is right at our feet. The rest of the world is already there. We are controlling the lighting, temperature and alarm systems of our homes from our smartphones while 3,000 miles away on vacation. My buddy has a drone fully equipped with a live-view HD camera, GPS and a return home function. If we don’t adopt the technology now, we don’t pull the skilled workforce we need, we don’t reduce our carbon footprint as soon as technically possible, and we don’t experience oil and gas industry nirvana.

Like our wildcatting forefathers, we are on the cusp of greatness. But in our case, there’s no guessing involved. It isn’t luck or a geological hunch that is going to bring the brave new world. Its strategy, drive and an innovative mindset. It’s the will and the desire to explore new terrain – terrain that already promises to be more cost effective, time efficient and environmentally sound.

Moving Toward Industry Nirvana

As filling the talent gap with new recruits isn’t very likely, digital technology is going to counter balance the loss of knowledge from the retirement of our current thought leaders, alleviating the consequences of losing that human capital. Automating basic analysis, decision-making and support practices will be lifesavers during this generational shift.

Digital oilfield technology is already cutting capital and operational expenses. The November 2015 BP Technology Outlook report confirms digital technologies applied in practice during the past decade reduced facility capital by one to three percent and lowered operating costs by five to twenty-five percent. In shallow water gas projects, BP reported that technology innovations yielded a lifecycle cost reduction of nine to thirty-two percent, a savings of three to eleven dollars per barrel of oil equivalent (BOE). Similar results were seen with oil sands projects (four to twelve percent lifecycle cost reduction and two to six dollars per BOE savings) and deep water oil projects (two to seven percent lifecycle cost reduction and one to three dollars per BOE savings).10

On the production side, digitization of the oil and gas industry is going to lift short-term production - the central factor in determining cost per barrel. BP reports that applied digital technology in the past decade increased oil and gas production by two to eight percent10. Technology will eliminate the need to drive across the oilfield, manually record data, drive back, enter the data, send it out, have it analyzed and finally take action. The entire reporting process will be expedited through remote cameras, mobile devices, sensors, 3D-imaging, nanorobotics and drones.

On the exploration side, technology is going to make the discovery process cheaper and more efficient. Exploration testing is now done by seismic and down-hole drilling, which are being vastly improved through seismic data analytics. We will be able to pinpoint reservoir locations and their exact chemical and physical makeup using nanorobotics - eventually mapping the earth’s entire subsurface.

Innovations in seismic imaging, drilling and recovery will aid in the discovery of additional oil and gas resources and, inevitably, we’re going to be moving into more geographically remote areas and harsher conditions. But we won’t have to send workers in to locate the best drilling spots or conduct inspections. Drones can do the hazardous jobs. Worker safety on the jobsite will be enhanced through automated production control, equipment monitoring and predictive shutdown systems that will become industry standard to aid in mitigating spills, explosions and other catastrophic events.

Nanobots along with remote metering will be able to collect unprecedented amounts of data. Once a well is brought on line, sensors at different points in the value chain, on the gathering systems, interstate pipeline systems, compressors, processing plants, the entire outfit – along with drones surveying the site and bringing in data. Advanced data storage techniques and data analytics will become invaluable in evaluating the massive amounts of data collected and interpreting its significance.

The oil and gas business is essentially a net present value business, characterized by the decline curve at which a well produces once it’s brought on line. A well establishes its initial production (IP) rate the day it goes on line, then continues to produce less and less into perpetuity, creating a decline curve. Decline curves are generated by petroleum engineers, taking into account their analysis of the reservoir and the capital that will be required to extract the hydrocarbons. Flattening the decline curve causes the value of the well to improve.

One way to flatten the decline curve is to bring production forward, closer to the initial production of the well. If you do that, the net present value (NPV) dramatically improves. That is offset by how much money you have to spend to actually bring the production forward. But the manmade reserve reports that generate the decline curves today contain a substantial amount of error – notably human estimations and assumptions. Advances in technology are going to allow us to auto-generate extremely accurate decline curves, more statistically accurate than a human can create, helping us to efficiently decide how to implement the exploitation of our reservoirs.

Ultimately, everything can feed into smart grid technology, aiding in a significant reduction of our carbon footprint. Whether natural gas is being used to cogen electricity or hydrocarbons are going to refineries to make plastics or gasoline, it will all be conducted in a manner that captures carbon and reduces carbon emissions into the atmosphere.